It is common for agents to offer or request a finder’s fee as part of a real estate investment transaction. As a Twin Falls rental property investor, there is a strong possibility that the subject of a finder’s fee will come up. If that is the case, you must be ready, which is why it is necessary to understand the finder’s fees. In this article, we’ll address what you can expect if you give or receive a referral and how to recognize the red flags of unusual or even illegal finder’s fee situations.
Finder’s Fee Basics
A finder’s fee, or referral fee, is a commission paid to an intermediary in a transaction. In real estate, the “finder” is someone who brings two parties together to facilitate the lease, sale, or purchase of a property. Real estate agents have been using finder’s fees to encourage their contacts to refer renters, buyers, or sellers to them, and in general, it is a perfectly legal process.
As said by state and federal law, a broker or agent can pay a finder’s fee to someone who helped them locate a buyer for one of their listed properties, found a property for a buyer, or otherwise helped them close a real estate transaction. For instance, if a real estate agent has a client who wants to buy or lease property in a new state, instead of trying to travel outside of their home state, that agent may recommend their client to a real estate agent in the other state. In exchange for this referral, the agent may charge for a finder’s fee because the transaction would not have happened without their cooperation.
A Typical Finder’s Fee
In general, the finder is given a commission in exchange for their referral. This commission or “fee” is normally a percentage of the deal and is paid out once the sale is complete. In many states, a finder’s fee can be anywhere from 3% up to 35%. The amount varies widely for the reason that the finder’s fees are regularly negotiated directly between the finder and a broker or agent. In most instances, finder’s fees are negotiated and agreed upon using written documents to streamline the process and avoid misunderstanding. However, there are occasions where there is no written agreement. Rather, an agent may write a check as a “gift” to the finder to acknowledge their assistance. While this may sound iffy, it is a perfectly legal practice in the real estate industry.
Red Flags to Watch For
Even though finder’s fees are both legal and commonly used, there are some red flags you should watch for. If you are ever demanded to pay a finder’s fee directly to an agent for a referral, there is a possibility that it is illegal. The majority of the finder’s fees must be paid out as part of the closing transaction. You need to have a real estate license to request and receive a finder’s fee in many states. If you are offered a finder’s fee but don’t have a license or are asked to pay a finder’s fee to someone who is not a licensed agent, either action could land you and the other party in serious legal trouble. Lastly, it’s vital to learn the state and federal laws in your area and go along with them as they pertain to the finder’s fees. While several states allow finder’s fees, there are sufficient discrepancies that you should research your own state’s laws before getting involved. Learn about the Consumer Financial Protection Bureau (CFPB) and the Real Estate Settlements and Procedures Act (RESPA), a government agency and a federal statute, respectively, that aim to prevent illegal activity in real estate transactions.
Whether you’re an experienced rental property investor or are just getting started, it’s important to have good information at hand and the right team on your side. If you are in the market for your next rental property, Real Property Management Magic Valley can help! Our Twin Falls rental management experts work with property investors like you to help you maximize both your cash flows and your investment portfolio. To learn more, contact us online or give us a call at 208-734-4001 today!
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